Income Tax: Is NPS still the best tax-saving financial instrument with deductions of 2 lakh per year?

 Income Tax: Is NPS still the best tax-saving financial instrument with deductions of 2 lakh per year?

NPS is one of the most effective tax-saving tools, allowing individuals to deduct more than Rs. 2 lakhs each fiscal year. Contributing to the NPS and claiming deductions under Section 80CCD of the Income Tax Act is one way to accomplish this.

During this peak tax planning quarter of January-February-March, you must be busy investigating various financial products that can provide you with the greatest tax benefits. In this article, we will look at the tax breaks available for National Pension Scheme (NPS) contributions each fiscal year. While it is one of the best retirement products, we will also investigate whether it is the best tax-saving tool.

How do I claim deductions for NPS contributions that exceed Rs. 2 lakh?

Individuals can deduct contributions to the NPS from their taxable income under Section 80CCD of the Income Tax Act. An individual can deduct more than Rs. 2 lakhs from taxable income each fiscal year. Let us look at how.

Section 80CCD(1): Up to Rs. 1,50,000 in self-contribution

Individuals can contribute to the NPS and deduct their contributions from their taxable income. Every fiscal year, a deduction can be claimed for contributions up to:

10% of employee salary, 20% of gross total income for self-employed individuals

However, the total of deductions under Sections 80CCD(1), 80C, and 80CCC in a fiscal year cannot exceed Rs. 1,50,000. The total deduction limit of Rs. 1,50,000 applies to investments in financial products such as life insurance, PPF, EPF, NPS, ELSS, and so on.

Section 80CCD(1B): An additional contribution of up to Rs. 50,000 is permitted.

Individuals can contribute to the NPS and claim a tax deduction under Section 80CCD(1B) of the Income Tax Act. The maximum deduction available is equal to the amount contributed or Rs. 50,000, whichever is less.

Please keep in mind that this is an additional deduction of Rs. 50,000 that you can claim in addition to the Rs. 1,50,000 deduction under Section 80CCD (1). You cannot, however, claim a double deduction for the same amount of Rs. 50,000 under Sections 80CCD(1) and 80CCD(2) (1B).

Assume you have made a Rs. 50,000 contribution to the NPS. In this case, you can deduct Rs. 50,000 only once under Section 80CCD(1) or 80CCD(2) (1B).

Section 80CCD(2): Employer contribution of up to 14% of salary, with no cap.

Employers can contribute to their employees' NPS accounts. The NPS contribution made by their employer is deductible from taxable income under Section 80CCD(2) of the Income Tax Act. The deduction can be claimed by the employee for:

The employer may contribute up to 14% of the employee's salary to the NPS (who is either the Central Government or the State Government)

Any other employer may contribute up to 10% of their salary to the NPS.

Section 80CCD(2) specifies the maximum percentage of salary that can be deducted as a deduction from NPS contributions. However, there is no limit on the absolute amount that can be deducted as an NPS contribution deduction.

Total deductions that can be taken on NPS contributions

In the preceding sections, we discussed how to claim deductions under Section 80CCD of the Income Tax Act. Let us summarise them all.

Section Deduction

In a fiscal year, the maximum deduction is 80CCD (1)

Employees may receive up to 10% of their salary, while self-employed individuals may receive up to 20% of their gross total income.

Contribution amount or Rs. 1,50,000, whichever is less 80CCD (1B)

up to the amount donated

Contribution amount or Rs. 50,000, whichever is less 80CCD

(2)

Employer contribution up to 14% of the salary for Central/State Government employees and 10% of the salary for other employees

No limit on the absolute amount contributed

As shown in the table above, any individual, salaried or self-employed, can claim deductions of up to Rs. 2 lakh (Rs. 1,50,000 + Rs. 50,000) under sections 80CCD(1) and 80CCD(2) (1B). Only salaried individuals are eligible for the deduction under Section 80CCD(2). It is also available only to salaried employees whose employer provides the NPS facility and contributes to their NPS account.

If an individual can claim deductions for NPS contributions under all three sub-sections, the total deduction available may exceed Rs. 2 lakhs. It can help an individual save a significant amount of net income tax. As a result, NPS is one of the best, if not the best, tax-saving tool available.